Should You Sell In May & Go Away?

April 19, 2017

Buy & Hold vs. Sell In May & Go Away                          

I decided to compare simply buying and holding the S&P 500 with selling in May and going away. For the Buy and Hold portfolio, I simply calculated the monthly returns of the S&P 500 Total Return Index as provided by Ibbotson Associates through 1998 and SPY, including dividends thereafter.

For the Sell in May portfolio, the S&P 500 is bought on the close of the last trading day in October, and sold at the close on the last trading day in April. Between May and October, the portfolio stayed in cash, and earned nothing.

When I crunched the numbers, here’s what I found: As detailed in Exhibit 3, Buying and Holding significantly outperforms Selling in May and Going to Cash on an absolute basis. But, not surprisingly, selling in May significantly reduces risk as measured by standard deviation. In addition, its Sharpe ratio—which compares the portfolio’s excess return to its standard deviation—is higher.

We now have a dilemma. If you’re like me, you want the higher return of the Buy and Hold portfolio, but you also want the lower risk of the Sell in May portfolio. Tweaking the basic strategy is the next logical step.

Sell In May & Go To Bonds

The next safest alternative to cash is bonds, specifically intermediate Treasuries. In Exhibit 3 below, I compare the previous two portfolios with a portfolio that invests in bonds during May through October. I used data from Ibbotson Associates until the end of 2002. Beginning in 2003, the iShares 7-10 year Treasury Bond ETF (IEF) is used.

Selling in May and Going to Bonds beats both Buy and Hold and Selling in May and Going to Cash on an absolute basis. Risk is lower than Buy and Hold, but higher than Selling and Going to Cash. Its Sharpe ratio is much better than either of the other strategies. Overall, it’s an intriguing proposition.

But with the Fed beginning to raise interest rates, some may get nervous having a higher exposure to bonds for half the year.

Sell In May & Go To Consumer Staples & Utilities

Sam Stovall, chief investment strategist of U.S. equity at CFRA, quoted in the article, “Sell in May and Go … Where?”, has recommended investing in the S&P 500 during the strong months. But during the weak months, he suggests investing in defensive stocks, specifically in the consumer staples and health care sectors of the market.

I researched this strategy, but with a twist. While I keep consumer staples in the portfolio, I use utilities instead of health care. I feel utility stocks are more defensive than health care stocks. Data is drawn from Fama-French until 1999, when the SPDR Consumer Staples ETF (XLP) and the SPDR Utilities ETF (XLU) are used. Both sectors are weighted equally.


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